Whether to lock in your mortgage or take your chances with a variable-rate depends on many factors, many of which have nothing to do with interest rates.

I’m not aware of all of the ins and outs of running the Bank of Canada (the Bank) but I do know it sets the overnight rate (the rate financial institutions use in financial markets for one-day, or overnight, loans).

Setting the rate is a complicated calculation, based on, among other things, the inflation rate and state of the Canada economy.

I boil it down to this: If the economy is bad, or in danger, the overnight rate is low; if the economy is roaring along at full speed and inflation is a threat, the rate is, by comparison, high.

The good folks at the Bank make rate announcements eight times a year, with the next one coming on March 6.

If this was March 2018, you’d likely win your bet if you wagered the Bank was going to hike the rate, which it did three times last year.

Stephen Poloz, governor of the Bank, was clear last year he was on course to getting the rate back to what he terms as neutral – somewhere around 2.5 percent and three percent.

Of course, that was before the full effects of the B-20 guidelines – the mortgage stress test – had been felt, so his approach to raising the rate was hawkish.

It looks like that bird has flown.

In remarks made by Poloz to the Chamber of Commerce of Metropolitan Montreal on Feb. 21, his tone was much more dovish.

“Housing markets are adjusting not only to higher interest rates, but also to new mortgage guidelines and rules aimed directly at cooling certain housing markets. Given the unique situation, we are monitoring the impacts carefully,” said Poloz. “Housing activity has been a little weaker than we expected recently. Mostly it is housing resales that have been soft, suggesting there may have been more froth in certain housing markets than previously thought. Housing markets that were not experiencing bidding wars appear to be adjusting in line with our expectations. However, more data will help us better understand the full situation in Canada’s housing market.

“Given these uncertainties, we have kept interest rates unchanged at 1.75 percent since last October. We will remain decidedly data-dependent as the domestic and international situations evolve.”

The data that should be guiding the decision to be made on March 6 has been piling up for more than a year, coming to a head with the release of national sales and other statistics for January 2019.

According to the Canadian Real Estate Association, sales in January were down by four percent from January 2018 and were the lowest monthly sales since 2015. The national average price also declined in January – down 5.5 percent year over year.

Poloz is on record as saying the mortgage stress test was not designed to cool off certain Canadian markets (spelled Vancouver and Toronto), but to improve the quality of household debt in the country.

The Bank has reported the quality of debt has improved, so the rapid cooling of housing markets across the country, including Vancouver and Toronto, must be an unintended consequence.

If by saying housing markets are adjusting, Poloz means they’re slowing down, he is obviously correct and he should consider not adjusting the overnight rate, at least upwards, next week.

A number of people in the financial field believe he will not raise the rate, including Dr. Sherry Cooper, chief economist at Dominion Lending Centre.

“The Bank of Canada meets again on March 6th and it is highly unlikely they will hike interest rates. The Canadian economy has been burdened with a weakened oil sector, reduced trade and a weak housing market. Although job growth has been stronger than expected, wage gains have moderated and inflation pressures are muted,” says Cooper. “Sluggish sales and modestly rising prices nationally are likely in prospect for 2019. While there will still be some significant regional divergences, there is no need for further policy actions to affect demand. Indeed, a growing chorus has been calling for lowering the mortgage qualification rate from the posted five-year fixed rate, currently 5.34 percent, to closer to the actual conventional rate, about 200 basis points lower.”

The housing slowdown has affected the entire Canadian economy, which is not as hot as it was a year ago, due in no small part to low oil prices, as noted by Cooper and inflation is around two percent.

Given these two factors, it is highly unlikely the overnight rate will be raised on March 6, which is good news for all, in particular for people who are trying to buy a home and pass the stress test.

And there’s the elephant in the room – the stress test.

In recent weeks, there have been calls from the Canadian Home Builders’ Association, Canadian Real Estate Association, real estate executives, the Building Industry and Land Development Associations (BILD) in Toronto and Calgary, as well as others to revamp the stress test.

No one is suggesting it be eliminated – it does serve a purpose – but it is too severe and needs to be modified.

Buyers need to qualify for their mortgage at 200 basis points above what their mortgage contract rate will be – this also applies to people renewing mortgages.

The general consensus is it should be reduced to 75 basis points, plus 30-year mortgages should be brought back.

This would help all buyers, especially first-time buyers, who are one of the most vital components of a healthy housing market.

This Week's Flyers

Comments

We encourage all readers to share their views on our articles and blog posts. We are committed to maintaining a lively but civil forum for discussion, so we ask you to avoid personal attacks, and please keep your comments relevant and respectful. If you encounter a comment that is abusive, click the "X" in the upper right corner of the comment box to report spam or abuse. We are using Facebook commenting. Visit our FAQ page for more information.